South African corporate taxpayers currently enjoy full utilization of assessed losses. In determining taxable income, the corporate taxpayers can set off their full extent of the balance of assessed loss carried forward from the preceding tax year, against their income with any unutilised assessed loss balance carried forward to future years of assessment, to be set off against future income.
Since there is no time limit to the carry-forward of the balance of assessed loss, a corporate taxpayer becomes liable for income tax once the balance of assessed loss is exhausted.
The full utilization is afforded by section 20 of the Income Tax Act, 1962 which permits taxpayers to carry forward a balance of assessed loss from previous years of assessment and apply such balance against their taxable income in the current year and in subsequent years of assessment.
As from 1 April 2022, in respect of years of assessment starting on or after that date, the position will change.
Clause 19 of the 2021 Draft Taxation Laws Amendment Bill proposes to limit, in respect of corporate taxpayers, the offset of the balance of assessed loss carried forward to 80% of the taxable income in the year of assessment. The effect of this proposed restriction, is that companies in a positive taxable income position before setting off the balance of assessed losses will be affected.
For example, currently, a company with a balance of assessed loss of ZAR1.5-million, that has a taxable income of ZAR1-million, will not be liable for income tax. ZAR1-million of the ZAR1.5-million balance of assessed loss will be set off against the taxable income of ZAR1-million, leaving the company with zero taxable income. The remaining unutilized balance of assessed loss of ZAR500,000 will be carried forward to the following year of assessment being available to be utilised against the taxable income that arises in that particular year.
Under the proposed amendment, only ZAR800,000 (being 80% of the taxable income of ZAR1-million) of the balance of assessed loss of ZAR1.5-million will be utilized against the taxable income of ZAR1-million leaving the company with residual taxable income of ZAR200,000 on which tax will be payable. The unutilized balance of assessed loss of ZAR700,000 will be carried forward to the following year of assessment being available to be utilised against the taxable income that arises in that particular year.
While the positive aspect of this proposal is that the full assessed loss may still be utilized albeit over a longer period and there will not be an impairment of the deferred tax asset by reason of this proposal, this proposal will have adverse tax cash flow implications.
The application of this proposal aligns with the reduction of the corporate income tax rate from 28% to 27% that will apply with effect for years of assessment also commencing on or after 1 April 2022.
National Treasury has justified this proposal by indicating that as a trade-off in implementing a corporate income tax rate reduction, there should be a broadening of the tax base in order to achieve overall revenue neutrality. Restricting the use of assessed losses against taxable income provides some of the fiscal space required to lower the corporate income tax rate and, as a result, forms part of a corporate income tax package to broaden the base and reduce the headline corporate tax rate in an overall revenue neutral manner. Over the past few years, there has been an international trend to restrict the use of assessed losses and reduce the corporate income tax rate; South Africa is following suit.
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